Effective January 10, 2014 we have new rules for seller financed transactions. If you sell a property and your buyer will live in the property, you are now considered a loan originator. The rules do not apply if you sell vacant land, commercial property, multi-family and/or a home where the buyer does not live in the property
Like all rules, there are exceptions. If you do not want to become a loan originator, but you do want to sell a property using a seller carryback, then simply follow the exceptions and you will be fine:
Exclusion #1 – You intend to sell only one property in a 12 month period where the buyer will live in the home.
1. You must sell the property as a “natural person.” This is defined as an individual, estate or trust. An entity – LLC, Partnership, Corporation, etc., is not a natural person.
2. You have not constructed the property or acted as a contractor for the construction of the property in the ordinary course of your business.
3. The terms do not result in negative amortization.
4. You may have a balloon payment.
5. You use a fixed rate of interest or an adjustable rate that is adjustable after 5 years or more. The rate change must be based on a widely available index such as LIBOR or the US Treasury. The annual rate may increase up to 2% with a lifetime cap of 6%.
6. You do not have to determine if the buyer has a reasonable ability to repay.
Note: These are easy rules to abide by, most note rates are fixed. If you want to use an adjustable rate, the rules tell you how to do it.
Exclusion #2 – You intend to sell up to 3 properties in a 12 month period.
1. You can sell these properties as a natural person or entity.
2. Same as #2 above.
3. The financing must be fully amortized. No balloon payment allowed.
4. You determine in good faith that your buyer has a reasonable ability to repay.
5. The financing interest rate rules in #5 above apply as well.
Note: You can determine reasonable ability to repay by knowing how much your buyer paid for rent and comparing that amount to the note payment. You can ask for a copy of his last pay stub. You can use common sense.
If you think you may sell more than 3 properties in a 12 month period or feel you have a unique situation, check with the CFPB( Consumer Financial Protection Bureau). Call 202-435-7700. Email at CFPB_reginquiries@cfpb.gov.
Note: I have emailed them twice and an attorney called me each time. Very helpful.
My source for this information is Ric Thom, owner of Security Escrow in Albuquerque, NM and our industry’s point man who is working on our behalf with the CFPB. We do not know how these rules will be enforced. He continues to meet with them to get them to try to understand our business and how we differ from mortgage lenders. He continues to suggest rules modifications. You can help. Go to www.savesellerfinancing.org. Read Ric’s White Paper. Make a donation.
